Optimal incentive schemes when only the agents' "best" output matters to the principal

Article Abstract:

A number of significant differences are noted between the standard principal-agent problem and the principal-agent situation when only the best agent's best output is used by the principal. The optimal incentive scheme will frequently differ across agents even when identical agents perform identical functions. Higher-powered incentive schemes result from relative performance evaluation in the standard problem, while the power of incentive schemes generally declines as multiple agents are introduced.

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Linearity with project selection and controllable diffusion rate in continuous-time principal-agent problems

Article Abstract:

Linear contracts are the optimal contracts. A key restriction of Holmstrom and Milgrom's 'Brownian model' is relaxed by allowing the agent to control the diffusion-rate process. A continuous-time principal-agent model wherein the agent can control the mean and variance of the principal's problem is presented. It is shown that even when the agent is allowed to control variance, the optimal compensation contract is linear in final outcome.

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Contractual contingencies and renegotiation

Article Abstract:

A one-variable contract is more advantageous than contracts with two variables such as those based on transaction costs or bounded rationality. The optimal set of contingencies on which an incentive contract must be based when renegotiation is possible is determined. Specifically, it is examined when increasing the number of variables or when restricting observability is advantageous.

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